Answer:
return = 20.81%
Explanation:
Capital Asset Pricing Model:
The capital asset pricing model (CAPM) is used to calculate the required rate of return for any risky asset.
Formula:
return = risk free + ( beta * ( market return-risk free ) )
where
beta is the standard deviation of the capital market line
Formula for standard deviation:
The standard deviation of the capital market line = x * standard deviation of market return
As Wal-Mart has an expected return of 14% and a volatility of 23%. The market portfolio has an expected return of 12% and a volatility of 16%.
Therefore by putting the values in the above formula, we get
0.23 = x * 0.16
x = 1.4375
As the risk-free rate is 5% and the market portfolio has an expected return of 12%
x = 5% + ( 1.4375 * ( 12% - 5% ) )
x = 20.81%
so return = 20.81%
